A confluence of disruptions is putting the brakes on global trade growth, increasing risks for financiers and exporters alike. Navigating this new landscape in 2019 requires a steady hand, and the right approach.
Earlier this month, the International Monetary Fund (IMF) cut its global economic growth forecast for 2019, as trade policy uncertainty, geopolitical risks and increasing trade tensions deter investment.
Meanwhile, the US-China trade wars, global trade tensions and tariff tit-for-tats, populism in the EU and Brexit, as well as a slowdown in major importing economies, also saw the World Trade Organisation’s (WTO) most recent quarterly outlook indicator, a composite of seven drivers of trade, fall to 96.3, the weakest since March 2010. A reading below 100 signals below-trend growth. Today, WTO economists expect merchandise trade volume growth for this year to fall to 2.6%, down from 3.0% in 2018.
Against this gloomy backdrop, trade finance – the lifeblood of global trade – is also becoming increasingly difficult to come by. The trade finance gap, which represents the difference between trade finance supply and demand, is calculated by the Asian Development Bank (ADB) to be a massive US$1.5tn. According to the WTO, 80-90% of world trade relies on trade finance, and in half of the countries of the world, access to trade finance is one of the top three obstacles to exporting, with as many of 60% of trade finance requests being rejected.
The reasons for growing trade finance rejections are manifold, but the one-two punch of derisking and the decline in correspondent banking relationships has left many banks unable to provide enough trade finance to keep the wheels of global trade moving, leading to abandoned transactions as exporters are unable to get the support they need.
“What we are seeing at the moment is quite a lot of conservatism from both the banks and the non-bank funders in their appetites and their risk-taking abilities. This, combined with the fact that a lot of financial institutions are reducing their correspondent banking networks because of the cost and complexity of compliance, again reduces their appetite and their ability to take and distribute risk,” explains Michel Kilzi, managing partner of Fineon Exchange, a global match-making platform that connects exporters, financial institutions, insurers, ECAs and trade organisations to deliver trade and export finance solutions.
While research on the trade finance gap shows that it is SMEs who experience the biggest barriers to accessing trade finance, Michel Kilzi points out that larger entities are also struggling. “It is almost counterintuitive, as you would think all the multinationals have got all the banks they need and they get everything they want, but this simply isn’t the case. We are finding that large corporates are not getting from their banks the support they need, particularly if they are looking to export into some of the higher-risk emerging markets. They are finding that their house banks aren’t always there any longer, and in some cases haven’t effectively been there for some time.”
For Kilzi, solutions such as Fineon Exchange represent a path through the increasingly complex trade finance environment, by enabling exporters to tap into different types of financiers who have the appetite to support them. “There is no one financial institution that can provide all the facilities and all the answers,” he says. In order to overcome this challenge, Fineon Exchange’s platform brings together credit insurers, banks and non-bank funders with differing appetites in terms of country and industry risk, tenors of financing, and geographies, and makes this available to exporters through one easily-accessible conduit.
A safe bet
Global risks in trade finance itself are relatively low, compared to other types of financing and assets, but a lack of knowledge and awareness has kept institutional investors away from the asset class – until recently.
“A lot of non-bank financiers are looking at the receivables and the trade finance space with a lot of interest,” says Ray Webb, head of business development at Fineon Exchange. “They see it as a reliable asset class. It’s relatively safe, it’s predictable, it’s based on long-standing trade flows and relationships and there is a historical performance that you can look to, and you can credit enhance the risk using credit insurance.” One trend he sees is a surge in interest from specialist funds who are looking to deploy significant volumes of cash into trade receivables. “What they like with trade receivables is its short-term nature. For short-term liquidity between major significant investments, they can deploy funds which otherwise sit around and don’t generate any income thanks to the new technology which is making it more accessible for them,” he explains.
This uptick in new funding sources will not only provide exporters with better choice, but will bring much-needed liquidity into the industry, enabling more trade deals to be done in more geographies.
“The major banks are still there, but also there are some of the smaller regional banks that have special appetites and niche businesses, and increasingly, some of the specialised funds that are looking to home in on specific types of funding in particular parts of the world. When looking at the funders that are accessible through Fineon Exchange, I liken it to a patchwork quilt. It gives you total coverage, it covers all the trade finance facilities that you will need, but it is made up of lots of individual squares, from the big international banks to the smaller specialised financiers and non-bank funders sewn in there to fill in the gaps,” says Webb.
Compliance: from burden to enabler
A key stumbling block to funding trade flows is the ever-increasing regulatory burden on transactions. According to Thomson Reuters, some major financial institutions spend up to US$500mn annually on know your customer (KYC) and customer due diligence, while its 2017 survey found that the average corporation spends 26 days a year to provide KYC regulatory information.
While a number of efforts are underway to standardise and centralise areas such as KYC and anti-money laundering (AML), many banks are still living in fear of heavy fines from regulators, in many cases choosing to play it safe and scrap the deal. But the advent of new technology, in particular machine learning and artificial intelligence, could provide an avenue out of the confusion for trade financiers. “At some point in the future, we will reach a point where AML and compliance can be done automatically through a platform,” says Webb, who explains that Fineon Exchange’s system currently enables it to pull together all of the requisite information from exporters to present to banks, saving exporters the legwork of having to present various permutations of the same information to numerous financiers. “Over time, the machine will learn which institutions want what, and then make sure that we have that information ready for them,” he adds.
Recent warnings from Coface that China’s companies are being hit by a surge in delays in getting paid for their goods and services, and a gloomy research piece by Euler Hermes on the potential for an uptick in business insolvencies in the UK, have bolstered the case for credit insurance. But tapping into the right insurer isn’t always easy. Today, the platformisation of the industry looks set to take the guesswork out of insuring transactions. “When a transaction comes in from the exporter, we match-make it with the funders and insurers based on their likes and dislikes, and match-make the credit insurance with the funders to find the cover that best fits the transaction,” says Webb.
Although technology solutions cannot be the panacea to all of global trade’s ills, harnessing the power of artificial intelligence to give exporters access to the wider marketplace while providing funders and insurers access to business that fits their requirements will go some way towards enabling quality transactions to achieve the funding they need.
FINEON Exchange offers optimised funding and insurance coverage for the receivables of European companies exporting to developing countries, by matching exporters with potential local, regional and global funders.
FINEON Exchange serves as a marketplace, where exporters can request offers for their export receivables portfolio online to funders willing to purchase them and insurers willing to cover them. Exporters will benefit from risk mitigation around obligor risks, while having access to a large pool of funders and insurers for an optimised export financing scheme.
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